This week’s economic calendar featured several important releases. In August, U.S. consumer prices exhibited a larger-than-anticipated year-on-year acceleration, mainly triggered by a surge in gasoline prices, which may influence the Federal Reserve’s interest rate trajectory for the remainder of the year.

The Labor Department’s widely monitored consumer price index (CPI), a metric gauging price increments, registered a 3.7% annual increase in August, surpassing July’s 3.2% figure and surpassing the consensus estimate of 3.6%. On a month-to-month basis, the CPI recorded a 0.6% rise, a notable acceleration from the previous month’s 0.2%. The sharply rising gasoline prices were the primary contributor to this rapid monthly ascent, accounting for more than half of the overall increase, as reported by the Labor Department.

Core inflation which excludes volatile components such as food and fuel, exhibited a 0.3% rise on a monthly basis, exceeding expectations of a 0.2% reading. The yearly core CPI tapered from 4.7% to 4.3%, aligning with projections. This marks the smallest annual increase in underlying inflation in nearly two years.

Mitigating high inflation has been a central objective of the Federal Reserve’s comprehensive campaign of interest rate hikes over the past year and a half. While it is widely anticipated that policymakers will leave rates on hold at their September meeting, uncertainties loom over their decisions later in 2023.

Subsequent inflation data released on Thursday indicated that the producer price index for August posted an annualized gain of 1.6%, surpassing projections of 1.2%. Additionally, retail sales for August recorded a 0.6% increase, surpassing forecasts of 0.2%. Concurrently, the weekly volume of Americans seeking unemployment benefits stood at 220,000 last week, lower than expected.

Retail sales exhibited less deceleration than initially projected for August, but consumers are grappling with mounting pressures, including elevated gas prices and the resumption of student loan repayments. The U.S. economy could face additional challenges if the United Auto Workers proceed with a strike following the expiration of their contracts with Ford, General Motors, and Stellantis.

Source: TradingView

Over the past two months, the U.S. benchmark index has been adversely affected by the surge in the 10-year Treasury yield, as persistent economic strength may tip the Fed to consider another interest rate hike either in November or December. Although hiring and wage growth have moderated, there are no clear indications of a downturn at this juncture.

Nonetheless, the U.S. economy may be approaching a turning point, as the substantial savings accumulated early in the pandemic have been largely depleted, pent-up demand for goods has been satisfied, and discretionary spending faces new constraints due to rising gas prices and student loan repayments.

A potentially significant disruption could arise if the United Auto Workers disrupt auto production, and the looming risk of a government shutdown at the end of the month adds further uncertainty.

The U.S. benchmark index rebounded in late August and gains could extend in the next few months. However, price swings are likely to become choppier and upside from here is likely to be limited as the index approaches its all-time high of 4,774.